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Thursday, May 19, 2011

Expert predictions: Mark Zandi edition

I came across this compendium of Mark Zandi (Chief Economist, Moody's Analytics) predictions. I've read and heard many interviews with Zandi over the years, and he always seems like a thoughtful guy. But it's not surprising that he, like other experts, has no more predictive power concerning complex events than monkeys throwing darts.

What is amazing to me is how Zandi can remain so confident about his capabilities when sufficient evidence has accumulated to the contrary. I suppose talking heads, pundits, market economists (and even some successful scientists and corporate leaders) are selected specifically for this kind of overconfidence. There's no room for intellectual honesty when you're trying to get ahead ;-)

Ritholtz: The Fed, Treasury and the Senate Budget Committee appear to have a favorite private sector economist, one who has managed to become a favorite even though he works for a unit of the same rating agency whose analysis is intrinsically tied to both the market, banking and housing crisis.

Mark Zandi of Moody’s Economy.com is routinely trotted out as an independent expert. He was the sole economist at the August 17 Treasury Conference on the Future of Housing Finance, the Fed’s REO and Vacant Properties conference and has now testified at the September 22nd Senate Budget Committee hearing on “Assessing the Federal Policy Response to the Economic Crisis”.

Never mind that, based on Zandi’s record, either his analysis is just wrong or his independence is compromised. Everyone seems to like to hear the guy who is saying what people want to hear, even the press appears to prefer “feel good” analysis to considering the accuracy of his record. ...

“It’s at least three or four quarters before we see the bottom of the housing market,” Zandi said.

Wire & Staff Reports – Oct 27, 2006

“The housing market correction is in full swing but it probably has another year to go before it bottoms out,” said Mark Zandi, chief economist at Moody’s Economy.com.

Los Angeles Times – Jan 6, 2007

“Mark Zandi, chief economist for Moody’s Economy.com, said jobs and wages were growing too fast for their own good. He warned that higher wages could induce companies to raise prices, which could lead workers to demand higher wages — an inflationary wage-price spiral.”

[Note: The chart below shows 3-mo. Changes in total civilian compensation. It seems not to demonstrate any wage-price spiral:

Marketwatch - March 26, 2007

"Zandi sees a bottom for sales in spring as sellers become more motivated and start cutting prices." [Note: In August 2010, new home sales fell to the lowest level since 1963, when the government began to keep records.]

New York Times – March 18, 2007

“Weakness in the market has been concentrated in certain segments,” says Mark Zandi, chief economist of Moody’s Economy.com. “We’re not witnessing the entire housing market in metro areas caving in.”

16 comments:

esmith
said...

Recently I came across a study, checking predictions of a bunch of high-visibility "experts".

Paul Krugman came out on top, being right something like 80-90% of the time. Some people had records so abysmal that you would've been better off listening to what they say and expecting the exact opposite.

But this was a relatively short term study, looking at predictions since 2008 or 2009.

Ideology is a huge factor. My read of the current prognosticator scene is that many modern talking heads, including some high-class economists (e.g. John Taylor and Greg Mankiw) subscribe to the "party line" of the GOP, and make forecasts not so much based on their own knowledge, but based on that party line. If the GOP is in favor of deficits and weak dollar (say, during most of the Bush era), pocket prognosticators stay silent on the issue, or argue that there's no problem. If the GOP decides to shoot for balanced budget and strong dollar, they suddenly come out with their warnings & forecasts. They even have a bunch of their own biased think tanks, such as Cato and Heritage. WSJ editorial board is completely dominated by the GOP pocket prognosticators. Krugman has been periodically having fun of the WSJ editorial board forecasting the return of "bond vigilantes" who'd drive treasury bond yields up any time soon - for the last three years, just as the 10-year has been falling. This is not all that surprising since WSJ is owned by the same people as Fox News.

Compared to WSJ & Co, Zandi has actually been doing a pretty good job.

Ultimately the problem is that there's no real accountability in this sphere, on the contrary, there are very good reasons for economic prognosticators to keep being financed as long as someone likes what they say, even if their forecasts end up false more than 50% of the time.

I should clarify what I meant by "as a whole", which was not that *every* area was in a bubble, but that many/most places (including ones far from the coasts) were, and that the implied value of total US housing stock was significantly inflated.

Paul Krugman came out on top, being right something like 80-90% of the time.

This certainly accords with my own impression. I've closely read several daily papers for many, many years, and over the last decade or so, I'd say Krugman's not only been by far the best MSM columnist, but just about the only remotely decent one. Amusingly enough, Slate was eager to get rid of him for exactly this reason, and there was a major push to get him dumped from the NYT when he first started there.

It's really quite bizarre since Krugman's neither a writer nor a pundit by background, but actually a top-quality professional economist. Considering that there are 300M Americans, his uniqueness really is quite odd. Perhaps all the MSM outlets have a general policy that no smart and non-corrupt people need apply. It's about the only logical explanation that comes to mind...

He's probably not on anyone's payroll, which is good. But where was it exactly that he predicted the the "recovery" from mid-2009 thru the present would result in aggregate growth in GDP that was actually less than the aggregate growth in the federal deficit? Because if he didn't predict that, then he failed miserably.

Well, I don't really pay much attention to economics, partly because I don't think I really understand it and partly because I'm not sure anyone else does either. But I do remember Krugman publishing at least a dozen or so columns in early 2009 during the Stimulus Debate in Congress, saying that the size was much too small, so it would probably fail, discredit the whole concept, and be a disaster.

Well, it did more or less fail and did discredit the whole concept in certain circles, so Krugman was proven completely correct. Since I don't understand economics, I can't say whether he was correct for the right reasons or for complerely wrong reasons...

I wonder how Steve feels about expert predictions in graduate school admissions (or UG admissions). He decides on grad school admissions I think. Would a purely mechanical process do just as well as professors reviewing applications?

The thing with the stimulus is that it peaked at less than 2% of GDP, in the presence of the output gap that peaked around 7% of GDP.

What you need to understand here is that there are basically two schools of thought in macroeconomics: one, neo-Keynesian (Krugman's), where $1 in deficit spending by the federal government translates into more or less than $1 in GDP growth, depending on how you spend it, e.g., all else equal, $1 towards extended unemployment benefits might boost GDP by $1.50 or $2, whereas $1 towards tax cuts on capital gains might boost GDP by $0.25. On the other hand, there is a neoclassical school, which starts with the assumption that all individuals are perfectly rational and, consequently, $1 in deficit spending has the effect on GDP that is exactly zero: in the neoclassical worldview, any boost to GDP due to government spending is matched by opposite and equal contraction in public spending, because people start saving more in anticipation of higher taxes in future (this is called "Ricardian equivalence").

As you can imagine, if economists can't agree whether $1 towards extended unemployment benefits results in $2 or $0 in GDP growth, there's very little they can agree on. And, in particular, they can't agree about the expected route of the economy in the absence of stimulus.

And so we're reduced to observing that the stimulus peaking at 2% of GDP was implemented and we ended up with an output gap of 7% of GDP. The stimulus But we have no universally agreed-on model that would tell us whether the output gap would have been 5%, 7%, or 9% in the absence of stimulus. All we know is that we did the stimulus and we still ended up with double digit unemployment. For some people that may be damning enough.

It might, although you'd need a way to quantify research record, which is a big component of strength of application. Some applicants have already published research whereas others haven't done much other than take classes.

What is sad is that there is little interest in trying to understand the "validity" of factors (GRE general, GRE physics, UG GPA, research record, etc.) used in the current process.